Could the latest be the last?

The Federal Reserve raised the fed funds target range by 25 basis points today, lifting it to a range of 5-5.25%. This marked a 16-year high for the policy rate and the 10th increase since the tightening cycle began in March 2022.

A contextual change in the FOMC post-meeting statement hinted strongly policymakers are content to move to the sidelines for a while. Out was the March statement’s sentence: “The Committee anticipates that some additional policy firming may be appropriate.” In was: “In determining the extent to which additional policy firming may be appropriate to return inflation to 2% over time.” 

Chair Jerome Powell said the decision to pause hadn’t been made but emphasized that policy action at the upcoming meeting in June would be more data dependent than ever. We think this is the appropriate stance. Until the economic impact of tighter credit conditions resulting from the March banking sector stresses is better understood, taking a breather is warranted.

In light of the banking turmoil in mid March, we have been watching for signs that the Fed may be revisiting its quantitative tightening plans. None took place today. The FOMC will continue to reduce its holdings of Treasuries and agency securities (including agency mortgage-backed securities) at a pace of $95 billion per month.

Powell came under fire over the supervisory shortcomings connected with the failures of Silicon Valley and Signature banks, saying the Fed would address its failings. In response to questions about the debt limit, though, the Chair responded “we shouldn’t even be talking about a world in which the U.S. doesn’t pay its bills.” We completely agree.

The Fed kept the administered rates unchanged, increasing the Reverse Repo Facility by 25 basis points to 5.05%. Powell said he was not concerned about its recent growth.